Tableau Software Takes a Standing Eight

The world has taken a few spins since "Big Data" visualization and analytics company Tableau Software (DATA) reported Q2, 2015 earnings results on July 29th. Although Tableau had an exceptional quarter, the stock failed to maintain orbit at $131/share, and has crashed to near par value at roughly $103 in the past two weeks. The primary reason for the decline is that traders bid the stock up to nosebleed valuations, and it couldn't maintain the upward trajectory based on Q2 sales and earnings.

Source: Stock Charts

I've talked ad nauseam about equities included in the Investor's Business Daily Top 50 List, and how they tend to crash and burn with even the slightest blemish in valuations in the quarter-to-quarter trading environment we're in. The recent price decline in Tableau just illustrates the point. The company graced the upper echelon of the IBD 50 until short-term traders opened the floodgates, and dumped whatever inventory they had on hand. Exhibit A is the right hand side of the above chart. The stock declined close to 20% in one day.

This is not a slight to the IBD 50. Far from it. We're currently in a market that pays up for growth, and holding periods are minimal on a historic basis. This trend will probably continue unless there is some sort of penalty for selling securities held less than a year, such as higher capital gains rates. It hasn't paid to be a value investor, or long-term investor in this market. Now with a shift of mind-set in Tableau as a short-term trade, I want to examine the last two conference calls closer to see if this could be a good buying point.

In March of 2014, I wrote my first post about Tableau. It was a hot IPO at the time, and I thought the equity was expensive, but was in a good position in regards to its technology. Since that posting, revenue valuations have been cut in half, and the company is now profitable, but it is still an expensive security. Trailing 12 month Price/Sales Ratio is currently 14. However, this hasn't stopped traders from piling on, driving the price higher. This may be attributed to impressive execution.

According to Investor's Business Daily:

"Tableau has beaten analyst estimates on earnings and revenue in each of the nine quarters for which it has filed reports since making its IPO in 2013. Revenue gains have been in the double-digit percentages."

In the investing environment we're in, a good growth stock can levitate for years. This is especially true when your computational efficiency is considered to be leading edge. Tableau's specialty of data visualization has been proclaimed pioneering by both company execs, and The Gartner Group. A ringing endorsement by The Gartner Group can go a long way in enterprise software sales. Company chief Christian Chabot noted in the 2015 Q1 Conference Call:

"Gartner is very influential, very well read. And particularly, in regions where we don't have a lot of brand recognition, it is one of our more important awareness vehicles and sources of lead flow."

If we examine some statistics from the past four years, you can see why Wall Street considers Tableau Software a top notch growth stock. Although earnings are minuscule and lumpy on a year-to-year basis, sales and a healthy R&D budget are accelerating. Some of the increase in sales may be from the inclusion in Gartner's Magic Quadrant three years running.

	2014	2013	2012	2011
Revenues (in thousands)	$412,616	$232,440	$127,733	$62,360
R&D (in thousands)	$110,923	$60,769	$33,065	$18,387
Net Income (in thousands)	$5,873	$7,076	$1,427	$3,379

If we extrapolate revenue statistics out to full year 2015, company guidance is for a range of $617 million to $627 million, up from the $600 million to $610 million from Q1. This represents an annual growth rate of approximately 52% at the high end of the range. It should be noted that Tableau, like the majority of enterprise software corporations, lands a considerable amount of large contracts at the end of the fourth quarter. Some of these sales will come from international markets, which now constitutes 25% of business. In fact, Tableau is opening a new Data Center in Paris to make further inroads in overseas opportunities.

Competition in the "Big Data" visualization niche remains fierce. Rivals such as Microsoft (MSFT), Oracle (ORCL) and IBM (IBM) have much larger coffers than Tableau, but Tableau believes they've built the better mousetrap with first mover advantage.

CEO Chabot proclaims:

"And while everyone else is saying they're kind of figuring it out and doing it, Tableau remains the gold standard, and that will remain our main source of competitive advantage."

To maintain that edge, for the past two years the company spent a great portion of its R&D efforts on Tableau's new iteration, Tableau 9.0. It was released in Q1 with version 9.1 currently distributed in beta. It's the company's biggest leap in its history from version to version on server scalability and resiliency. Its strengths versus the competition continue to be incredible ease of use, a pioneering approach to visual analytics, a self-service platform, and a product that is finely tuned with all the world's disparate data.

Tableau now has 32,000 customer accounts worldwide. The company's "Land and Expand" sales strategy is a grassroots endeavor that has paid off handsomely, in both revenues and word of mouth advertising. Once a client signs up for the service, the Tableau Software sales team helps customers upgrade and incorporate the Tableau solution into other departments within large businesses. In Q2, they signed 233 transactions greater than $100,000 as companies continue to deploy Tableau more broadly within their organizations. Q4 should be a barn burner, but that's almost six months away.

Former NFL coach Bill Parcells is known for saying, "You are what your record says you are.". At this moment, Tableau has been a great long-term investment, especially if you bought it at the IPO price of roughly $30/share. Conversely, it's been a not-so-good investment if you bought at the top, only to see traders go into damage-control after the Q2 conference call. I believe for the time being, the selling has been done.

However, the bull market that started in March 2009 is almost six and a half years old. In addition, we haven't had a 10% correction in the S&P 500 since last October (intra-day, the correction was 9.8%). Therefore, although Tableau appears to have the secret sauce, and the digeratti has put it in the top spot in its niche, based on macro conditions, I'm betting Tableau Software trades lower along with the overall market in the next three months. After all, Tableau is expensive on a price/sales metric. P/E ratios aren't really relevant with young growth companies...at least not in this market, but maybe they should be. Companies with limited earnings may be the first to be liquidated if investors get defensive.

My buy point is between $80-$90 a share. An almost 20% decline. This will be especially true if the FED raises interest rates in September.

Twitter: The Grace Period is Over

In a take-no-prisoners trading culture, there was a mass exodus of investors in Twitter (TWTR) after interim CEO Jack Dorsey and CFO Anthony Noto reported anemic user growth in the Q2 2015 Conference Call. Originally, Wall Street liked the results of the second quarter when the earnings press release first hit the Web. According to the document, sales of $502 million for the quarter, up 61% year-over-year, and above the previously forecast range of $470 million to $485 million. The stock shot up over 7% in after hours trading.

However, the equity did an about face a few minutes into the conference call when the executive team discussed user growth, or lack thereof. The gears of capitalism ground to a halt, and the stock not only lost all after hours gains, but descended to near all time lows the next day of trading. Here are some quotes from members of the C-suite from both the prepared statements and Q&A session that accelerated the selling:

• "Specifically, we do not see organic growth."
• "Simply said, the product remains difficult to use."
• "Our growth rate in users is slowing quite dramatically."
• "We will take the necessary time to build the service people love to use every single day. And we realize it will take some time to show results we all want to see."
• "The DAU (daily active users) to MAU (monthly active users) ratio has gone down...because we’ve grown MAUs faster than DAUs, and we have not historically focused on driving daily active user growth."
• "Our organic growth is going to be very low as it was this quarter, and as I think about Q3, it’s marginally better, but I wouldn’t want you to or anyone else to expect a change in our growth rate relative to what you are seeing in this quarter."
• "We have only reached early adopters and technology enthusiasts, and we have not yet reached the next cohort of users known as the mass market."

That assessment is about as succinct as you'll get from high-tech management, or management in any publicly traded company. My hat's off to Jack Dorsey and Anthony Noto for not sugarcoating prospects going forward. However, it wasn't a bad quarter. Besides beating on the revenue front, Q2 adjusted EBITDA was $120 million, up 122% year-over-year. This is above the previous forecast range of $92 million to $102 million.

I believe a big problem with Twitter is perception. Early investors just got seduced by the Wall Street marketing machine. People thought this global brand on the digital frontier would be an instantaneous profit generator. In reality, it was an unprofitable story stock from the get go. If you bought the hype thinking the share price would be in an automatic upward trajectory, you got dealt a cruel hand. The equity may reach it's previous all time high of $75/share again, but that may take some time the way sentiment is going.

Twitter has some new initiatives going for it, which may be why Twitter bulls cling on to lofty price expectations. Most importantly, the company appears to have a growing relationship with Google (GOOG). Tweets are now integrated in the daily search of Google domestically, but only on the desktop. Mobile is a work in progress. In addition, there are other languages they will be expanding into internationally with Google desktop search, specifically within English-speaking countries.

A partnership with Google's DoubleClick will help improve advertising performance measurement. There's been speculation in the business press that Google would be a good suitor for Twitter, and that may be so, but that's just speculation. With Twitter's market cap of $21 billion, it would be an expensive acquisition for Google. Plus, regulators would have to approve the deal.

The acquisition of TellApart in late April is also discussed in the Q&A session. TellApart will remain a standalone business, although under the Twitter family of companies like Periscope and Vine. The marketing technology company provides retailers and e-commerce advertisers with cross-device retargeting capabilities. At this juncture, Twitter has no plans to monetize TellApart. Twitter paid $533 million for the company, so that just adds to the mounting expenses the corporation has accrued recently, including increased headcount and infrastructure build out. Nevertheless, these expenditures are a necessity to stay current in today's social media environment.

Like all companies, Twitter is in a state of perpetual flux. The partnership with Google, and the acquisition of TellApart, helps monetize the rabid base of over 300 million active monthly users. However, if current management plans come to fruition, Twitter may be taking steps backwards by making the service easier to use. In doing so, you take the chance of alienating the current user base, which may dilute end-user participation. Twitter is not a mass market product like Facebook (FB). It's a niche product.

Going toe-to-toe with Facebook would be a big mistake in my opinion. Facebook has 1.5 billion monthly active users, five times the population of Twitter. You need to invest intellectual capital to become well versed in Twitter. Therefore, you may have a more affluent user base. Facebook is basically plug-and-play. Octogenarians posting pictures of their grandchildren and other family members, to stereotype the process. Both demographics are important to advertisers, but followers on the Twitter communication platform may be more qualified, allowing higher advertising rates. After all, it's the Millennials and Gen-Xers that primarily use the communications service.

It was only a few weeks ago that I wrote my previous article about Twitter. To recap, I thought the equity was expensive, and that I wouldn't pay any more than $25/share for the company. With a trailing twelve month price/sales ratio of roughly 15, and very little earnings visibility, it's still expensive despite the recent selling spree. With a range bound stock market looking to take a breather, I'll wait on Twitter. It was a one-sided love affair on the way up, now a messy divorce on the way down. If I'm patient, I may get my price.

Mobileye: Autonomous Driving Pure-Play

Performing the song "Roadhouse Blues", Jim Morrison of The Doors once sang:"Keep your eyes on the road, your hands upon the wheel.". If management of Israeli firm Mobileye NV (MBLY) is correct, this mode of driving will become antiquated in the not so distant future. In fact, they're betting the farm on it with their proprietary System-on-a-Chip [SoC] technology called EyeQ. The current iteration of the product is EyeQ3, and has positioned the company as the global leader in the design and development of camera based ADAS (Advanced Driver Assistance Systems).

Developers are tackling the the technological challenges of autonomous driving through the use of sensors and imaging devices such as radar, lidar (lasers) and cameras. Although automakers are in the early innings of developing self driving cars, Mobileye appears to have trumped the competition because camera based systems have the scientific advantage at this juncture. At least this is my interpretation of Mobileye management's take on it.

There's been much speculation on the Internet the last year about driverless automobiles. Google (GOOG) has received most of the press, but now Apple (AAPL) and General Motors (GM) are coming into the conversation. Although all three of these organizations may take part in the autonomous driving mix somewhere down the line, it's Mobileye that's the pure-play in the field. What does Mobileye do with your car? Here is the layman's description of the company as stated by COO Yonah Lloyd in the Q2 2014 Conference Call:

Much like the human eye, the Mobileye Solutions performs driver seen interpretation, detecting and classifying different objects in the road including vehicles, pedestrians, traffic signs and more. The systems capabilities range from providing lane departure warnings, forward collision warnings for vehicles and pedestrians, to more complex driving enhancement features such as autonomous emergency breaking.

Mobileye's client list is a literal Who's Who of car manufacturers with the exception of Toyota. The company's c-suite doesn't believe they can get Toyota into the fold until 2018, if indeed Toyota decides to become a customer. In addition, there is usually a five to seven year period when they are first introduced to a manufacturer until their product is included in serial production. So don't expect the number one automaker to add to Mobileye's top line anytime soon.

However, the company is in good shape with the current car manufacturers under contract. In 2016, there will be 244 car models utilizing EyeQ3 technology. Below are some specific applications of the Mobileye solution in today's world:

• In September, GM announced that it expects to release cars equipped with hands-free driving abilities on highways. GM is calling this feature the Super Cruise, which includes Mobileye technology, and it's expected to be available in 2016.
• Tesla announced plans to provide all of its Model S cars with full ADAS functionality, which also includes Mobileye camera technology.
• Mobileye is in the new Ford Mondeo sedan where their system can help determine if a person is crossing the road, and if needed can reduce the brakes up to full automatic stop. Ford expects the car to be available in Europe during 2015.
• The Audi Q7 will be showcasing Mobileye's most advanced capabilities. Specifically, the capacity to perform full breaking collision avoidance.

The corporation is not resting on past laurels. Mobileye maintains their cutting edge by by plowing a substantial portion of their revenues back into research and development. Approximately thirty-three percent in 2014. Commercial shipments for their next generation product EyeQ4 begin in 2018. Ten times faster than its predecessor, EyeQ4 will enable the use of seven cameras, which will help bridge the gap from semi-autonomous to autonomous driving. The chip is developed in collaboration with Mobileye partner STMicroelectronics (STM), as were previous generations.

As stated in the inaugural annual report, Mobileye management believes the total addressable market for camera-based ADAS systems for autonomous driving could reach $15 billion in the next several years. Management believes they will capture a substantial share of this market because of four reasons. One, long penetration cycles. Two, the data they have generated over the past 15 years allows them to optimize their proprietary algorithms. Three, they have the most advanced and most cost effective system in the market. Four, they have succeeded to lead in innovation, and bundle applications in one compact system.

Sounds great, but here's the rub. Hyperbolic headlines in the business press touting the wonders of self-driving cars may come to fruition, but not for another ten years according to CEO Ziv Aviram. It's a process that will come in increments. Although Mobileye is in the pole position with its SoC for automated driving, it has gotten way ahead of itself on a valuation basis. There's an old stock broker's mantra of "Sell the sizzle, not the steak.". Overzealous Wall Street pundits may be pushing up the price of Mobileye because it's the fair haired child of the semiconductor and automotive industries.

In this investing environment we are currently in, investors are paying up for growth. Especially freshly minted Initial Public Offerings. Mobileye had its IPO in July of last year, and it's been a thrill a minute ride for investors with the stock doubling in twelve months.

Source: Yahoo! Finance

Nevertheless, the equity is very expensive if we utilize traditional valuation metrics. Forward P/E (for the full year 2016) is a whopping 85. This is based on the average analyst earnings estimate of $.71/share. Earnings growth is projected to grow in the 80% range for the next two years, which is why traders may have elevated the security in addition to the overall autonomous driving market hype. Price/sales doesn't get any better with the trailing twelve month figure at 84. As of June 30th, the short float was 13.2%, and may be higher because the stock has escalated.

Revenue guidance for full-year 2015 is only $217-$218 million, but Mobileye has a market cap of $13 billion. This is not an optical illusion. Although sales growth is a healthy 51% compared to 2014, the equity is way over its skis, ready for a tumble if it misses earnings estimates. The company doesn't give quarterly earnings projections, and has stated quarter-over-quarter results can fluctuate due to timing of orders, and the introduction of new vehicle models containing Mobileye products.

Although this is an exciting company, the time to buy Mobileye was four months ago when it traded in the $30 range. At $60/share, it's buyer beware. Patient investors may get a better entry point after the next conference call in early August. Better to let the day traders and momentum machines sell their shares to each other for the time being.